Slouching Towards Utopia?: The Economic History of the Twentieth
Century

-XXI. False--and True--Starts to Development in the Third World-

J. Bradford DeLongUniversity of California at Berkeley and NBER

February 1997

Decolonization

Government by the Thieves

Juan Peron and Argentina

The Case of Iran

Patterns of Growth

The Key Role of Mechanization

The Left in the Third World

Decolonization

When the European colonial powers Britain and France withdrew
from their empires, the bureaucracies and structures of government left
behind were that of the industrial west: representative parliamentary institutions,
independent judiciaries, laws establishing freedom of speech and of assembly,
and a strong civil service tradition among the bureaucracy. The hope was
that, freed from the oppressive controlling hand of colonial rule, democracy
in the newly-independent former colonies was thought likely to fiourish.
And since their economies would no longer be controlled in the interests
of the imperial power, economic prosperity should follow as well.

But it was not to be. In most countries the political
aftermath of decolonization was a catastrophe. Westminster-style parliamentary
politics and independent judiciaries soon became rare exceptions: found
only in India (a very important exception indeed) and a few others.

Instead, régimes emerged that derived their authority
not from electoral competition between different groups of possible representatives
but from the army and the police suppressing dissent with a varying level
of brutality, or--in the best case--from populist attachment to a charismatic
nation-symbolizing reforming leader.

In many places the economic aftermath was also a near-catastrophe.
Relatively less oppressive modern dictatorships produced rapid and impressive
economic growth in the non-Communist fringe of Pacific Asia, and in
Saharan Africa. India with great tenacity maintained its hold on parliamentary
democracy (but its economic growth was unimpressive).

But long-independent Latin America by and large continued
to fail to close the relative income gap vis-a-vis the industrial west
(although it continued to increase GDP per capita in absolute terms). And
in a large belt beginning in South America, taking up almost all of tropical
Africa, and also including much of southern Asia, economic growth has been
the exception and not the rule over the past generation.

In Africa south of the Sahara, only Botswana, Lesotho,
the Cameroon, and perhaps one or two others have managed to reduce the
relative income gap vis-a-vis the industrial west. Kenya, Mali, Malawi,
Zimbabwe, Guinea, the Côte d'Ivoire, Nigeria, and South Africa among
others in Africa have seen rising living standards, but a rising relative
income gap vis-a-vis the industrial core. In these countries the glass
is still half-full: increasing relative income gaps vis-a-vis the industrial
core have been nevertheless accompanied by rising living standards and
productivity levels.

But in another group of countries the average person is
probably poorer in absolute terms than their counterparts back in
1965: Mozambique, Togo, Ethiopia, Tanzania, Senegal, Ghana, Madagascar,
Chad, Zaire, Zambia, Niger, and Uganda, among others in Africa; Argentina,
Boliva, Chile, El Salvador, Jamaica, Nicaragua, Peru, and Venezuela among
others in Latin America.

Why has this happened? What has gone wrong? The storehouse
of industrial technologies developed since the industrial revolution is
open to all. The forms of knowledge and technologies that make the industrial
west today so rich are public goods. The benefits from tapping
this storehouse are enormous, and have the potential to multiply
the wealth of all social groups and classes--property owners and non-property
owners, politically powerful and politically powerless alike--manyfold.
All developing economies ought to have experienced not just substantial
growth in absolute living standards and productivity levels, but
ought to have closed some of the relative gap vis-a-vis the world's industrial
leaders since independence.

Yet a large proportion of the successor régimes
to colonial domination have failed to do so.

Absolute poverty is not the reason. Even relatively poor
parts of the third world today have levels of material wealth as high as
those found in seventeenth century Scotland or Italy. Resource scarcity
is not the reason: the world as a whole can far more than feed itself,
and there is no shortage of mineral and energy resources to provide constructive
and socially valuable work for even unskilled hands.

Government by the Thieves:

One short answer is that the fault--where there is fault--lies
in governments: kleptocracy--govenment by the thieves, as it has
been named in analogy with aristocracy (goverment by the best), monarchy
(goverment by the one), and democracy (government by the people)--has impoverished
much of the third world over the past generation.

A longer answer would detail why bureaucrats, army officers,
and politicians in the third world, as benevolent and as concerned with
national wealth as bureaucrats, army officers, and politicans anywhere,
have so often sacrificed economic development and the long-run interests
of all to the short-run interests of a relative few.

Many modern dictatorships rule because the army tolerates
the present rulers, either the politicians or the set of colonels who led
the last coup. The first priority, therefore, is to keep the army
happy: well-fed and supplied with expensive war toys imported from abroad.
Modern dictatorships rule peacefully because they control the visible centers
of sovereignty: the physical locations in the capital from which the bureaucracy
expect to receive their orders, and the centrally-located radio and television
broadcast sites through which the rulers speak to the nation. Modern dictatorships
are thus very vulnerable to urban discontent. If an urban riot overruns
the president's palace, the ministries, or the television stations, then
the government's rule is in serious danger. The second priority, therefore,
is to avoid urban riots. And the third priority is to keep the notables-the
bureaucrats and the political operatives-content, and potential opposition
quiet or disorganized.

The pursuit of these aims comes prior to the formation
of policy in the minds of rulers. All rulers believe they are the best
people for the job: alternative ruling groups are at best incompetent,
most likely wrongheaded and corrupt, and at worst amoral and destructive
tyrants. Unless the government can stay in power, nothing good will be
achieved for the country or the people. And so the first and most
benevolent deed they can dois to make sure they remain in power. Only after
the government's seat is secure will debates about development policy take
place. But the pursuit of a secure hold on power almost always takes up
all the rulers' time, energy, and resources-and thus makes their development
policies for them.

To achieve the primary aim of damping down potential threats
to the government, money is necessary. And not just any kind of money.
Urban workers can be appeased by cheap food and high wages, but the army
and the bureaucracy require imported luxuries, which requires that the
government gain control of exports. Therefore governments squeeze export
agriculture most of all: the acquisition of large revenues from it is the
most important means to the preservation of the government's authority.
And governments squeeze the rest of agriculture next: cheap food helps
to avoid urban riots. High urban wages also protect against urban discontent,
and urban discontent is dangerous because it immediately threatens the
symbols of authority and sovereignty.

An overvalued currency makes everyone willing to do the
government favors so that they can have access to scarce currency import
pemits; and it makes imported luxuries relatively cheap. This policy package
thus meets with the approval of the military, of the bureaucrats, and of
the urban masses. The only politically powerful groups that remain whose
interests are harmed by these policies are the bourgeoisie, the
business class, the entrepreneurs and industrialists that serve as the
engine of economic development in market economies.

Why don't potential entrepreneurs--those who would benefit
most from pro-development policies, and whose enterprises would in turn
employ and sell to and thus benefit many others--work to overthrow
this anti-development ruling régime? Political scientist Robert
Bates asked this question of a cocoa farmer in Ghana, seeking to learn
why successful cocoa farmers did not lobby and agitate for a reduction
in the huge gap between the price the government paid them for cocoa and
the price at which the government sold the cocoa on the world market. "He
went to his strongbox," Bates reports:

and produced a packet of documents: licenses for his vehicles,
import permits for spare parts, titles to his real property and improvements,
and the articles of incorporation that exempted him from a major portion
of his income taxes. "If I tried to organize resistance to the government's
policies on farm prices," he said while exhibiting these documents,
"I would be called an enemy of the state, and would lose all these."

Businessmen find themselves heavily taxed and restricted
by the state. But they also know that they continue to operate at even
this reduced level because of the permission of the state, and that the
state has the power to shut them down. The most vulnerable spot is usually
the requirement of businesses to import goods to maintain their equipment.
Permits for such imports are easy to control or withhold, are relatively
cheap to provide, and yet can serve as sources of very strong pressure:
without small and inexpensive imported spare parts, large, expensive, and
highly productive imported machines will not work.

Besides, the state can also protect key existing businessmen
from potential competition: potential future entrants into industries produce
the most social benefit from an economic development perspective,
yet have no resources with which to lobby because they have no existing
businesses or clients. Restricting them does existing businessmen a favor
at very low political cost. Since the overvalued exchange rate has made
foreign currency a scarce good, competition from manufacturers abroad can
also be easily strangled in selected sectors as a favor to key existing
businessmen.

These redistributions from the entrepreneurial cutting
edge of the economy to politically powerful interest groups are particularly
expensive in the long run because the social benefits from innovation,
entrepreneurship, and enterprise are so high. Observers of Africa, in particular,
find it hard to believe that the present set of policy régimes
can last for long: it is so demonstrably and obviously irrational and destructive.
But then the Soviet Union's centrally-planned economy operated for nearly
seventy years before an ideological sea change led to large scale demands
for reform; and whether reform in the Soviet Union will be successful is
still an open question.

The natural conclusion from third world history is that
successful economic development is difficult without either a limited
government or a developmental state: the logic of politics is that of favors
performed, wealth redistributed, infiuence exercised, and taxes collected;
that is very different from the logic of economic growth. Only a state
that is limited in the amount of damage it can do to the economy, or a
state that is secure enough, independent enough, and committed to rapid
economic growth can avoid this development trap.

Yet throughout the post-World War II period intellectuals
on all sides have applauded the strength of the state, on the ground that
only a strong state could perform the historical tasks necessary for economic
development. As one usually clear-eyed observer, the political scientist
John Hall, put it:

forced development is socially brutal. Such development cannot be achieved under the ægis of soft
political rule, and this means that the chances of a transition to democracy
are correspondingly at a discount. [M]odernization, under whatever politicial
ægis, involves at least disciplining the peasantry and at most forcibly
removing it from the land. the removel of tribalism, the destruction of
rival cultures, the creation of a lingua franca, and the establishment
of national bureaucracies. Third World countries have learnt with time
that successful modernization is impeded by democracy. For people do not
easily accept the loss of their land and of their customary ways of life:
this requires force [and]a totalizing ideology."

If past patterns continue, the future of much of the third
world is one of continued relative economic stagnation.

With some luck, however, an increasing relative gap does
not mean absolute decline: instead, there ma well be absolute improvement
in productivity levels and living standards--but not as fast as productivity
growth in the industral core.

Juan Peron and Argentina:

To see how these forces worked themselves out in the years
after World War II, take a closer look at one instructive case: that of
Argentina.

The first thing to know about Argentina is that it
has no business being a third world nation today. In 1929 Argentina had
appeared as rich as any large country in continental Europe. It was still
as rich as Europe in 1950, when western Europe had for the most part reattained
pre-World War II levels of national product.

In response to the social and economic upheavals of the
Depression, Argentina adopted demand stimulation and income redistribution.
These policies were coupled with a distrust of foreign trade and capital,
and an attraction to the use of controls instead of prices as allocative
mechanisms. Argentina's growth performance in the post-World War II period
was very poor. Even in the 1950's, and even relative to Britain, Argentine
growth was slow.

Carlos Díaz-Alejandro provided the standard analysis
of Argentina's post-World War II economic stagnation. According to his
interpretation, the collapse of world trade in the Great Depression was
a disaster of the first magnitude for an Argentina tightly integrated into
the world division of labor. While Argentina continued to service its foreign
debt, its trade partners took unilateral steps to shut it out of markets.
The experience of the Depression justifiably undermined the nation's commitment
to free trade.

In this environment Juan Perón gained mass political
support.

Taxes were increased, agricultural marketing boards created,
unions supported, urban real wages boosted, international trade regulated.
Perón sought to generate rapid growth and to twist terms of trade
against rural agriculture and redistribute wealth to urban workers who
did not receive their fair share. The redistribution to urban workers and
to firms that had to pay their newly increased wages required a redistribution
away from exporters, agricultural oligarchs, foreigners, and entrepreneurs.

The Perónist program was not prima facie unreasonable
given the memory of the Great Depression, and it produced almost half a
decade of very rapid growth. Then exports fell sharply as a result of the
international business cycle as the consequences of the enforced reduction
in real prices of rural exportables made themselves felt. Agricultural
production fell because of low prices offered by government marketing agencies.
Domestic consumption rose. The rural sector found itself short of fertilizer
and tractors.

Squeezed between declining production and rising domestic
consumption, Argentinian exports fell. By the first half of the 1950's
the real value of Argentine exports was only 60 percent of the depressed
levels of the late 1930's, and only 40 percent of 1920's levels. Due to
the twisting of terms of trade against agriculture and exportables, when
the network of world trade was put back together, Argentina was by and
large excluded.

The consequent foreign exchange shortage presented Perón
with unattractive options. First, he could attempt to balance foreign payments
by devaluing to bring imports and exports back into balance in the long
run and in the short run by borrowing from abroad. But effective devaluation
would have entailed raising the real price of imported goods and therefore
cutting living standards of the urban workers who made up his political
base. Foreign borrowing would have meant a betrayal of his strong nationalist
position. Second, he could contract the economy, raising unemployment and
reducing consumption, and expand incentives to produce for export by decontrolling
agricultural prices. But once again this would have required a reversal
of the distributional shifts that had been his central aim.

The remaining option was one of controlling and rationing
imports.

Not surprisingly, Perón and his advisors believed
that a dash for growth and a reduction in dependence on the world economy
was good for Argentina. Díaz Alejandro writes:

First priority was given to raw materials and intermediate
goods imports needed to maintain existing capacity in operation. Machinery
and equipment for new capacity could neither be imported nor produced domestically.
A sharp decrease in the rate of real capital formation in new machinery
and equipment followed. Hostility toward foreign capital, which could have
provided a way out of this difficulty, aggravated the crisis...

Subsequent governments did not fully reverse these policies,
for the political forces that Perón had mobilized still had to be
appeased. Thus post-World War II Argentina saw foreign exchange allocated
by the central government in order to, first, keep existing factories running
and, second, keep home consumption high. Third and last priority under
the controlled exchange régime went to imports of capital goods
for investment and capacity expansion.

As a result, the early 1950's saw a huge rise in the price
of capital goods. Each percentage point of total product saved led to less
than half a percentage point's worth of investment. Díaz Alejandro
found: "[r]emarkably, the capitalin electricity and communications
increased by a larger percentage during the depression years 1929-39 than
1945-55," although the 1945­55 government boasted of encouraging
industrialization. Given low and fixed agriculture prices, hence low exports,
it was very expensive to sacrifice materials imports needed to keep industry
running in order to import capital goods. Unable to invest, the Argentine
economy stagnated.

In 1929 Argentina had appeared as rich as any large country
in continental Europe. It was still as rich in 1950, when Western Europe
had for the most part reattained pre-World War II levels of national product.
But by 1960 Argentina was poorer than Italy and had less than two-thirds
of the GDP per capita of France or West Germany.

One way to think about post-World War II Argentina is
that its mixed economy was poorly oriented: the government allocated goods,
especially imports, among alternative uses; the controlled market redistributed
income. Thus neither the private nor the public sector was used to its
comparative advantage: in Western Europe market forces allocated resources--even,
to a large extent, for nationalized industries--the government redistributed
income, and the outcome was much more favorable.

In the absence of the Marshall Plan in particular and
of an internationalist United States interested in fighting the Cold War
and restructuring western Europe in general, might have Western Europe
followed a similar trajectory?

In Díaz Alejandro's estimation, four factors set
the stage for Argentina's relative decline: a politically-active and militant
urban industrial working class, economic nationalism, sharp divisions between
traditional elites and poorer strata, and a government used to exercising
control over goods allocation that viewed the price system as a tool for
redistributing wealth rather than for regulating the pattern of economic
activity.

From the perspective of 1947, the political economy of
Western Europe would lead one to think that it was at least as vulnerable
as Argentina to economic stagnation induced by populist overregulation.
The war had given Europe more experience than Argentina with economic planning
and rationing. Militant urban working classes calling for wealth redistribution
voted in such numbers as to make Communists plausibly part of a permanent
ruling political coalition in France and Italy. Economic nationalism had
been nurtured by a decade and a half of Depression, autarky and war. European
political parties had been divided substantially along economic class lines
for a generation.

Yet Europe avoided this trap. After World War II Western
Europe's mixed economies built substantial redistributional systems, but
they were built on top of and not as replacements for market allocations
of goods and factors. Just as post-World War II Western Europe saw the
avoidance of the political-economic "wars of attrition" that
had put a brake on post-World War I European recovery, so post-World War
II Western Europe avoided the tight web of controls that kept post-World
War II Argentina from being able to adjust and grow.

The Case of Iran:

Could things have been better? The case of the Iranian
Revolution suggests that in many cases the answer is "no." For
the reasons that the Shah of Iran was overthrown in 1979 had relatively
little to do with his faults (which were many), but had much to do with
obstacles to successful economic development.

The Imperial Iranian government was a tyranny. It had
a fierce and dreaded secret police. It used revenues from sales of
government-owned oil to build up an impressive and powerful military. But
these were not the reasons that the Shah was overthrown.

The Shah hoped to use the bulk of oil revenues to turn
Iran into an industrial country in one generation. This meant, first,
land reform: distribute land to turn tenants and sharecroppers into independent
farmers, and compensate landlords with government oil revenues. But rapid
population growth and a desire not to offend rich landlords too much
meant that the plots distributed were small. The boom in oil exports and
the rise in oil prices together pushed up Iran's exchange rate by a wide
margin: and with an overvalued exchange rate, it became profitable
to import food. So newly-propertied peasant farmers found themselves with
small plots and facing declining prices for what they sold.

They were supposed to become bulwarks of the regime, grateful
to it for distributing land. Instead, they scratched what they saw as an
inadequate living off of too-small plots, or moved to the cities. While
a large share of the Iranian population saw their incomes growing rapidly
in the years leading up to 1979, a large share of the Iranian population
did not.

Steps to emancipate women proved unpopular among traditional
infiuence makers as well. Steps to boost education-and the Shah was
truly and genuinely committed to turning Iran into a literate, educated,
technologically-proficient country-also produced a large body of students
and intellectuals attracted to revolutionary politics.

From exile, the Ayatollah Khomeini--a former opponent
of land reform--lit the fuse, calling on the Islamic clergy and the people
to seize power from the despot and make an Islamic revolution. A forty-day
cycle of demonstrations began, during which young religious activists would
be shot by the police, thus triggering another demonstration forty days
hence to mourn their deaths. In January 1979 the Shah fied into exile.

Thereafter Iran's economy stagnated. The decade-long war
with Iraq absorbed tremendous resources. And the newly-dominant religious
government had little interest in economic development: "the Iranian
people did not make the Islamic revolution to reduce the price of watermelons."

From a cynical perspective the interesting question might
be not why was there economic stagnation in much and absolute economic
decline in some of the third world, but why there was rapid growth in other
portions. Brazil, Mexico, and Panama in Latin America; Morocco, and Tunisia
in Saharan Africa; and Hong Kong, Malaysia, Singapore, South Korea, Taiwan,
and Thailand in Asia are just some of the countries that have made impressive
strides toward closing the relative material prosperity gap vis-a-vis the
industrial west in the post-World War II era. How have they managed to
do this? What have been the key factors separating successful from unsuccessful
episodes of economic development?

Patterns of Growth

Four simple factors together account for half of the variation
in economic growth rates of developing countries since World War II:

First, equipment investment. Developing economies
that devote a large share of their national product to investments in machinery
and equpment grow rapidly. A one percentage point boost to the equipment
investment share of GDP is associated with an 8 percent increase in GDP
per worker over the time span of a twenty-five year generation.

Second, other forms of investment.

Third, initial output per worker: the poorer a
country, the more room for technology transfer and the faster growth.

Fourth, labor force growth: the faster labor force
growth, the more difficult it is to educate, train, and equip the labor
force with capital, and the slower is growth.

But what reason is there to think that these factors--especially
equipment investment--are determinants rather than consequences of growth.
The chief reason is the law of supply and demand: where growth is high,
the relative price of capital goods is low. High equipment investment,
low equipment prices, and rapid growth go together. If rapid growth was
the cause of high investment, then the chain of causation would run from
rapid growth to high future profits, from high expected profits to
a high rate of investment and a high demand for equipment, and from
a high demand to a high quantity of investment and a high price
of equipment.

A high demand will lead to a high quantity only insofar
as the high demand raises the price, and so makes it profitable for
domestic producers to expand production and importers to expand imports.
If high machinery investment were an effect rather than a cause of rapid
growth, we would expect to see a high rate of growth and of machinery investment
also associated with relatively high prices of machinery and equipment.

By contrast, if high equipment investment drives rapid
growth, then we would expect to see supply conditions (pro-growth government
policies, and a favorable environment). Favorable supply leads firms
and investors to migrate down and to the right along their demand-for-machinery
curve, and leads to a high quantity of equipment only insofar as the price
is lower. If a high quantity of equipment leads to a rapid rate of economic
growth, and so we see a high rate of growth and of equipment investment
also associated with relatively low prices of machinery and equipment.

The importance of equipment investment as a correlate
of growth in is not new. There is a similar pattern in the long run growth
record of industrialized countries. This suggests that the association
of machinery investment and productivity growth is not a result of any
particular features of the post-World War II period, but instead refiects
a deeper structure that will be present in most cases of industrialization
and development.

TheKey Role of Mechanization

Why should machinery play such a key role? It is, of course,
no accident that the era in which European economic growth took off is
called the Industrial Revolution. Blanqui, first to use the
phrase in print, identified its beginnings in the invention and spread
of those "two machines, henceforth immortal, the steam engine and
the cotton-spinning [water frame]." Ever since, qualitative historical
discussions of growth have emphasized the role of machinery investment
in augmenting labor power. The statement that "the machine is at the
heart of the new economic civilization" is typical of accounts that
have assigned a central role to mechanization. Technology embodied in machinery
has been"the lever of riches."

Historians of technology have argued that the capital
goods industries are uniquely well suited to serve as centers for technological
diffusion to other sectors of the economy where such knowledge had practical
applications. Rosenberg cites the Brown and Sharpe milling machine, built
during the Civil War to make twist drills required for musket production.
The newly invented machine turned out to have uses far beyond its initial
application. "[W]ithin ten years afterthe first machine in 1862,"
Brown and Sharpe "had sold similar machines to manufacturers of hardware,
tools, cutlery, locks, arms, sewing machines, textile machinery, printing
machines, professional and scientific instruments, locomotives"
and in subsequent decades sold to " a succession of firms producing
cash registers, calculating machines, typewriters, agricultural implements,
bicycles, and automobiles." The new technology is largely embodied
in the milling machine, and diffuses rapidly throughout the economy to
the extent that other firms purchase the machine tool.

If the case studies cited by the historians of technology
are representative, they suggest-like the international cross-section-that
a high rate of machinery investment is necessary for rapid economic growth.
Certainly an anemic rate of machinery investment has been associated with
rapid relative economic decline in the past, notably that of Britain. In
1870 Great Britain was still the center of the world's most advanced technologies.
But, as Arthur Lewis puts it, by 1913: "organic chemicals became a
German industry; the motor car was pioneered in France and mass-produced
in the United States; Britain lagged in the use of electricity, depended
on foreign firms established there, and took only a small share of
the export market. The telephone, the typewriter, the cash register, and
the diesel engine were all exploited by others." This is certainly
consistent with the hypothesis that a lack of intensive practice using
the machines that embody cutting-edge technologies retards the development
of the skills necessary to efficiently use such cutting-edge technologies.

This suggests a strong role for the right sort of government
intervention to advance industrial development: the government should step
in because private investors do not face the right incentives to invest
early and heavily in modern machinery and equipment. The private market
system is, on this interpretation of the way the world works, likely to
do a relatively bad job in encouraging the pattern of economic activity
that will lead to very rapid growth, because those whose decisions are
key for growth--firms that purchase and use machinery and equipment--do
not recognize and are not rewarded according to the total social return
to their actions.

A government that could be trusted to concentrate on economic
development, and not on state-building or on its own maintenance of power,
should be capable of generating a rapid acceleration of economic growth.

But how many governments can be so trusted? And what are
the preconditions for the successful creation of a "developmental
state"? These are questions to which no one has the answers.

Is a high rate of machinery investment sufficient
for successful development? Clearly not. It is possible to commit very
large portions of national output to equipment investment and yet to grow
slowly. Equipment investment appears to produce large benefits only
if market price signals--rather than administrative allocations--guide
its use. Are the two factors of a high rate of machinery investment and
a market economy together sufficient for rapid economic growth? Perhaps.
At least, to date there are no strong counterexamples. And both the macroeconomic
and microeconomic evidence can bear the interpretation that equipment investment,
when the allocation of equipment is determined by market price signals,
is the strategic factor in long-run economic growth.

Over the past two decades, many have argued that the typical
systems of regulation introduced in developing countries to accelerate
development were in fact retarding development. First, they were preventing
the economy from responding to international price signals by shifting
resources to activities in which the country had a long-run comparative
advantage. Second, they were inducing firms and entrepreneurs to devote
their energies to seeking rents by lobbying governments instead of seeking
profits by lowering costs.

Critics of this line of thought have not been silent.
They have pointed to countries-most notably Japan and Korea--that are by
every definition prone to rent-seeking behavior, have explicitly eschewed
laissez-faire development strategies, and yet have grown very rapidly.
And they have argued that just because some cases of government regulation
have been destructive does not mean that all will be, or that at the relevant
margin a shift to an activist "industrial policy" will be harmful.

Noting the salience of machinery investment as a determinant
of productivity growth points the way to a reconciliation. Countries like
Japan and Korea have exhibited relatively low, not high, prices of machinery.
This suggests that producers of capital goods have more often than not
been on the losing side of rent-seeking coalitions in Japan and Korea.
If equipment truly is an important factor in economic growth, then high
growth is consistent with a policy régime that is susceptible to
rent-seeking as long as interests seeking high prices and low quantities
of equipment investment are on the losing side of political contests. But
note that rent-seeking behavior has presumably had a significant negative
impact on consumer welfare in Japan and Korea, by depriving consumers of
access to imports and by preserving agricultural sectors that consume much
land and yield relatively little by world standards.

The general conclusion is one that Adam Smith or Karl
Marx would have found natural: market economies prosper and grow when they
are managed in the interests of the business class. When governments intervene
to shift prices and quantities in order to distribute income away from
the productive and entrepreneurial classes-both current and prospective
future members of the bourgeoisie-and toward others, whether urban
consumers, bureaucrats, or small-scale inefficient rice farmers-economic
growth and development suffers.

However, there are powerful pressures on governments,
particularly on non-representative "modern dictatorships" peculiarly
vulnerable to urban unrest and military coups, that push them in the direction
of becoming anti-developmental states.

These pressures have, in the post-World War II period
at least, been strong enough to counteract the natural tendency for poor
countries to learn rapidly about technology and catch up to rich ones.
There is no clear reason on the horizon for these pressures to diminish.
Optimists hope that the record of economic failure provided by much third
world experience in the past generation will lead to the creation of intellectual
pressures for reform strong enough to overcome the bias for stagnation.

And if ideas truly are the decisive forces making history
in the long run, perhaps the optimists are right.

The Left in the Third World:

Yet another factor has made successful development difficult
since World War II. The ideological currents of the post-World War II era
have also made it more difficult for governments. Governments that
listened to intellectuals from the left because the left had been anti-colonial--while
the center and the right were, before World War II, imperialist. Thus the
Indian National Congress would look to the British Labour Party--their
friends in Britain--for advice on how to create the preconditions for successful
economic growth.

And left wing political opinions throughout most of the
twentieth century have been at least somewhat Marxist. Thus Marxist doctrines
that markets are evil in their essence--that markets were bad, hence anything
that replaced markets must be good--had a large influence on third world
development policy in the first post-WWII generation.

The tying of left wing commitments first to the Leninist-Stalinist
régime established in Russia after the Bolshevik Revolution, and
then to the successor régimes that emerged from decolonization did
harm to the political left as a moral entity. Marx had looked forward to
immense material wealth evenly distributed, to freedom of occupational
and residential choice, to representative governments, to free speech and
free association. But the governmetns that the political left found itself
associated with--the products of the Bolshevik revolution and of decolonization--had
relatively little of these.

The commitment to representative government was the first
commitment the political left threw overboard: only an educated and informed
electorate could exercise its right to vote, and until such an educated
and informed socialist electorate could be created, a centralized party
was necessary in its place. To rank representative institutions high on
any list of the criteria of a good society was, it was mistakenly thought,
implicitly to attack decolonization and to defend the late colonial order.
The commitment to free speech and free association went next. Nation-building
required unity. If politicians and newspapers could whistle different tunes
and criticize the government, this would disrupt the fragile unity of new
nations. Then advocacy of private economic freedoms disappeared: all of
the resources of society had to be mobilized according to a single plan
for rapid industrialization.

As liberalism evolved in Europe, it proceeded from a demand
for personal rights (freedoms of movement, of occupational choice, and
of property, and rights against self-incrimination, against arbitrary arrest,
and to justice) through political rights (freedoms of speech, of assembly,
and of organization, and the right to choose one's governors) to social
rights (to social insurance programs, to a relatively equal distribution
of income, and to material wealth). All of these dropped away as the left
found itself in an increasingly uncomfortable embrace with the regimes
of "really existing socialism" and of post-colonial nationalism.

Thus the left-wing historian E.P. Thompson could write
in the 1970s that:

...the Communists of the 1930's and 1940's were not altogether
wrong, intellectually or politically.[the] visions [we feared] were of
Panzers or of Sherman tanks rolling into the East, breathing racial purity
or the freedom of capital down the barrels of their guns...

Put to one side the rhetorical pairing of Franklin Roosevelt
and Adolf Hitler as exaggeration not meant to be taken seriously. Note
instead that, in Thompson's mind, freedom of speech, freedom from arbitrary
execution, freedom to elect the government, and material wealth orders
of magnitude greater than that produced by Stalin's bureaucracy--all these
piled together--count for little because they come tied to "freedom
of capital."

Eggs are broken. The habit of breaking them on whim grows.
But no omelet appears.

Perhaps the worst place to be in the third world in the
fifty years after World War II was in the Communist regimes of Asia
China. The Chinese Communist Party had won the civil war (which was interrupted
for a while to fight the Japanese during World War II) because of
its ability to create a hierarchical organization that could exert power
in even the smallest of villages-a legacy that Mao owed to Lenin. Its opponent,
the Chinese Nationalist Kuomintang, retreated to Taiwan, reformed itself
(after an initial bloody massacre of Taiwanese), and became a model of
post-World War II economic development. The People's Republic of China
quickly became the personal dictatorship of Mao Zedong, and careened from
disaster to disaster.

Chinese agriculture appears to have recovered from the
devastation of World War II and the 1945-1949 civil war in the first
years of Mao's rule. Official statistics--worth in this case what
you pay for them--reported a seventy percent increase in wheat and rice
production between the end of the civil war and the mid-1950s. The small
share of China's population resident in the cities did worse, as private
enterprise was destroyed and social parasites executed or sent off to concentration
camps. Considerable technical and economic aid from the Soviet Union aided
Chinese development before the Sino-Soviet ideological split in 1960.

The late 1950s, however, saw the beginning of a downward
spiral. Agriculture was collectivized: individual farms replaced by village
communes dominated by the local party official. The collectivization of
agriculture was followed by the "Great Leap Forward": a policy
that sprang from Mao's visionary inspiration to lessen China's industrial
and human underdevelopment by making use of hte human resources of the
whole country--to replace the "material" factor by the "spiritual".
Never mind what the technocratic "experts" said could not be
done; the "Red" revolutionaries would do it. People would make
steel in backyard furnaces. China would industrialize village-by-village,
without imports of foreign capital goods or the advice of foreign engineers.

Of course it was a disaster. To command--from the center--that
peasants go out and build backyard blast furnaces guarantees that you will
get little steel and less grain. Because the dictator had set out this
policy on his own, everyone reported that the Great Leap Forward was proceeding
magnificently. Perhaps forty million people died in the famine.

As the extent of the disaster became known, Mao's principal
lieutenants moved slowly and cautiously against him. In December 1958 Mao
was replaced by Liu Shaochi as head of state, with Deng Xiaoping as Liu's
right hand man. In July 1959 Peng Dehuai, one of the highest ranking military
officers and Minister of Defense, accused Mao of "subjectivism"
and "petty bourgeois idealism", and sought Mao's effective retirement.
Mao was retired, but Peng Dehuai was condemned for "rightism"
and dismissed from the party and the government.

It took six years before Mao could arrange a counterstroke,
using his power as symbol of the regime. His political counteroffensive
was a call to destroy the leadership of the Communist Party, to "bombard
the headquarters" in order to eliminate bureaucracy. Once again the
"Red" was exalted over the "expert". Liu Shaochi was
killed; Deng Xiaoping imprisoned for the heresy of claiming that it was
more important to be competent than to be politically correct--"a
good cat is not a cat that is red or white, a good cat is a cat that catches
mice." Universities were closed; engineers were sent to the countryside
to work with the peasants; technocrats of all kinds dismissed from their
jobs. Mao's counterstroke was successful--although he then had to assassinate
his new defense minister, Lin Piao, to keep Lin Piao from doing to him
again what Liu Shaochi had done a decade before.

We do not know the human cost of the Cultural Revolution.

We guess that in 1970--after the first phase of the Cultural
Revolution--that China's level of material prosperity was perhaps half
that of India's, and was the rough equivalent of today's level of material
well-being in Tanzania or Ethiopia or Mali or Madagascar, the poorest countries
on earth.